2281 · 3.4

Trade unions — practice questions

Practice and worked examples for 2281 Trade unions. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

In a competitive labour market for warehouse workers, demand is Qd = 1 000 − 50W and supply is Qs = 200 + 30W, where W is the hourly wage in $ and Q is the number of workers. A trade union negotiates a wage of $12 an hour for its members.

(a) Calculate the equilibrium wage and level of employment. (b) Calculate employment at $12 and the number of workers who want a job at that wage but cannot find one. (c) Explain one circumstance in which the union could raise wages without reducing employment.

Show solution outline

Step 1 — Equilibrium (a): 1 000 − 50W = 200 + 30W → 800 = 80W → W = $10. Employment = 1 000 − 50(10) = 500 workers.

Step 2 — At the union wage (b): Qd = 1 000 − 50(12) = 400 employed. Qs = 200 + 30(12) = 560, so 160 workers want a job at $12 but cannot get one — an excess supply of labour. Employment has fallen by 100.

Step 3 — Why employment falls: the demand for labour slopes downward. At a higher wage firms substitute machinery for workers, cut hours or stop hiring.

Step 4 — When it need not (c): if the union agrees a productivity deal (workers' output per hour rises, shifting labour demand right); if the employer is a monopsonist paying below the competitive wage; or if demand for labour is very wage-inelastic (few substitutes for the workers, labour a small share of costs) — then a higher wage can leave employment unchanged or even raise it.

Diagram: draw D_L and S_L crossing at ($10, 500); a horizontal line at $12 shows Qd = 400 and Qs = 560, the gap being the 160 unemployed.

Worked example 2

Amara earns $18 000 a year as a hotel receptionist. The hotel workers' union charges a subscription of $120 a year. Last year it negotiated a 3% pay rise for members, while non-members received 1%. The union also provides free legal representation, worth an estimated $300 a year to the average member.

(a) Calculate the extra pay Amara would receive in a year as a member compared with a non-member. (b) Calculate the net financial benefit of membership, including the legal representation. (c) Explain one reason Amara might still decide not to join.

Show solution outline

Step 1 — Extra pay (a): member's rise = 3% × 18 000 = $540; non-member's rise = 1% × 18 000 = $180. Extra pay from membership = 540 − 180 = $360 a year.

Step 2 — Net benefit (b): benefits = 360 (extra pay) + 300 (legal representation) = $660. Cost = $120 subscription. Net benefit = 660 − 120 = $540 a year.

Step 3 — Why she might not join (c): she may expect to receive the union-negotiated rise anyway if the hotel applies it to everyone (the free-rider problem); she may dislike the risk of losing pay during a strike she did not vote for; or she may fear the employer's attitude towards union members.

Step 4 — Evaluation: the calculation shows membership pays for Amara this year, but the gain depends on the union keeping its bargaining power — in a recession with high unemployment the pay gap between members and non-members may shrink.

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